They're really unanswerable questions, but they seem to be on everyone's minds this morning as we review the financial crisis that struck with such ferocity a year ago: Should the government have saved Lehman Brothers?
What would have happened if it did?
Former Treasury Assistant Secretary David Nason and I discussed these questions on CNBC's Squawk Box this morning.
In his New York Times column this weekend, Joe Noceraasserted that the Lehman failure was necessary because only the ensuing crisis could have altered the political landscape enough to get the Congress to pass $700 billion worth of financial rescue funds.
Nocera is right about the political environment.
Some forget that we were in the midst of presidential and congressional elections -- a time when it's hard to get votes to commemorate Mothers' Day, let alone the most unpopular, if necessary, piece of legislation ever to be brought before the Congress. And even with lending frozen, banks tottering, recession a certainty, breaking the buck in money markets, extreme volatility in equity markets -- the legislation actually failed in its first go-around in the House of Representatives. So, crisis was the 'Mother of Courage...eventually.
Lehman Brothers wasn't singled out for failure. It was merely the weakest limping bank at the back of the herd. For months Lehman's CEO, Dick Fuld, had been on the receiving end of lots of solicited and unsolicited advice to save the firm either by raising private capital or selling to a stronger firm. Lehman failed to raise capital and Fuld’s pride prevented Lehman from accepting any merger options.
By the time “Lehman weekend” rolled around, the situation was far more complex and potential solutions were scarce: AIG was about to implode; JPM Morgan Chase– a relatively strong bank – was trying to absorb both Bear Stearns and Washington Mutual; the government had already taken Fannie Mae and Freddie Mac into conservatorship. Merrill Lynch saw the writing on the wall and escaped to what then passed for a safe harbor in merging with a sickly Bank of America .
So, should we have saved Lehman?
Hank Paulson, then the Treasury Secretary, Fed Chairman Ben Bernanke, and then-New York Fed President Tim Geithner all say the question is moot: they simply lacked the tools and resources to rescue Lehman. Others argue that we could have and should have given the carnage that followed. I would argue that had we “rescued” Lehman, the political fallout would have been so great as to risk Congress statutorily prohibiting further rescues, which would certainly have been necessary.